Thursday, June 28, 2018

I recently wrote about an article by Professor Victoria Haneman concerning the interaction of student debt planning with joint income tax filing. One of the things I discussed with her is a disturbing trend of schools coaching students to minimize their adjusted gross income in order to maximize the amount of their loan that will be forgiven if they stick with Income Based Repayment or similar programs. That brought up the subject of the future debt bomb.

When graduates complete their term in Income Based Repayment or something like it (twenty or twenty five years generally) the remaining debt is discharged. Depending on what they have been doing, the discharge might be taxable as COD income. If we think of someone who after getting a Ph.D. in history, toils for twenty years as an adjunct when not washing cars or waiting on tables, the amount of the discharge will be some multiple of the original debt, giving them a tax liability perhpaps as much as the original debt. The program is new enough that this has not happened to anybody - yet.

Bankruptcy is a better a deal, becaue debt discharge income while bankrupt is excluded from taxable income. But you can't get out of student debt through bankruptcy. Or can you? There have been murmurmings that it can be done. I heard from Alan Collinge of Student Loan Justice.Org. Alan argues that the chance of bankruptcy relief for people buried under student debt remains remote, and that the murumurrers may be consultants who are engaging in bait and switch.

Peter J Reilly: So Alan,is bankruptcy relief becoming more available for student loans?

Alan Collinge: In recent months, a false impression has been sewn in the mainstream media about student loans being dischargeable in bankruptcy. These articles, usually written by debt "coaches", credit counselors, and others with suspicious motives, cite statistics showing that 40-50% of people who attempt to get their student loans discharged win relief. These articles usually are accompanied by a litany of advertisements for the services that these people render. But when looking more closely at the statistics being thrown around, it becomes obvious that most of these articles are selling false hope to distressed borrowers, and that bankruptcy for student loans is impossible for the vast majority.

Reilly: How are they selling false hope?

Collinge: In these articles, one of the more frequently cited papers is from Jason Juliano (Harvard University Law School). Juliano found that about 40% of people attempting to get their student loans discharged in 2007 actually got some level of relief (either a partial or full discharge of the debt. Steve Rhode, a debt coach and blogger at the Huffington post claims that this has risen to 58% according to his own research.

Reilly: Well that sounds promising, Right?

Collinge: Wrong. First of all, Juliano's 2007 study could only find 213 cases where people actually tried to get a discharge for their loans. 213 people, compared to about 35 million student borrowers at the time. This is a ridiculously small sample size. But it gets worse. Rhode could only find 35 attempts to get student loans discharged in 2012 out of more than 40 million borrowers. If the first study's sample was ridiculously small, the sample Rhode used was nearly non-existent! To make any pronouncements about the likelihood of getting a bankruptcy discharge based on data as scant as these is an affront to science itself.

What's more, Rafael Pardo did a study from 2007, where he found that the debt-to-income ratio of the tiny number of people who attempted to get a discharge of their student loan debt was an "astronomical" 4.2 (Pardo's words, not mine) compared to a ratio of 1.2 for the average citizen filing for bankruptcy that year. It makes sense that the tiny number of people attempting to get their student loans discharged would be among the most extreme, severe cases. That only 40-50% of these get any sort of relief speaks volumes about the chances for ordinary citizens.

Reilly: Why do so few people attempt to get their students loans discharged in bankruptcy?

Collinge:There are very good reasons that so few people even attempt bankruptcy for their student loans. Almost no well-versed lawyers will recommend it because of the unlikelihood of winning. Also It is an expensive, stressful, and difficult process. What is more, since 2007, various repayment programs have been implemented that make "undo hardship" almost impossible to prove except for borrowers who have less than 20 years left to live, like a recent case that is being falsely touted as a game changer by many of the same "snake oil salesmen" I alluded to earlier. These repayment programs- even though they are being shamelessly administered to kick as many people out as possible- nonetheless serve as a basis for defeating the hardest "prong" of proving undue hardship; that the borrower is unlikely to be able to ever repay the debt.

And make no mistake, even for the most destitute borrowers, the Department of Education, ECMC, and the entire lending industry are continuing to pour massive resources into defeating them in bankruptcy court by using shameless fear tactics with the judges, who they pressure ceaselessly - and usually successfully- to make bankruptcy determinations against, these most impoverished individuals rather than for them. It comes as no surprise, therefore, that the already tiny number of people trying to use the bankruptcy laws for student loans has shrunk dramatically since 2007.

Saying that bankruptcy is possible for student loan borrowers is like saying that winning the lottery is possible - you can say it, but it ain't going to happen for the overwhelming majority of borrowers, even if they go through the expensive and difficult process of trying. The "debt coaches", and others perpetuating this myth have no intentions of guiding distressed borrower successfully through bankruptcy. Most are just trying to get them "in the door", so that they can sell them "loan rehabilitation", where the borrowers pay 10 months worth of payments (which goes into the pocket of the collection companies), the loan is repackaged as a much larger loan, and ultimately resold. The nearly 20% commission on these "rehabilitated" loans make this a hugely lucrative endeavor. Never mind that 60% of rehabilitated loans or more wind up defaulting a second time. This is among the scummiest and harmful components of the Student Loan Scam.

Reilly: Are there other aspects of this that trouble you?

Collinge: Yes. There is a larger, more sinister phenomenon at work here: the student loan industry cherry-picks data like these and pushes them in the media for the sole purpose of keeping bankruptcy gone from student loans, something that has allowed them to rob billions of dollars from millions of people over the years. This is a predatory cash cow for them, and they will grasp at the flimsiest of data in order to make the predatory student loan system look better, and to perpetuate the shocking financial carnage that is being inflicted upon millions, and is poised to devastate far more Americans going forward, and to a far greater degree.

Reilly: So is there a solution to this problem?

Collinge:There are three good bills in Congress right now that would solve this problem by, at long last, forcing the student loan industry to contend with the same bankruptcy protections that every other lender for every other type of loan must contend with.

A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means.

Declaration of the Rights of Man

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.